The Sweet Nothings Of A Toaster Oven

When you set out to learn about investment markets and how to profit from them, it’s not new technology or the Federal Reserve that you’re studying. What you’re really studying is human behavior.

You’re simply trying to figure out what products and services lead people to change the way they behave, and thus, the way they spend their money.

For example, take the idea of home networking.

I just read Michael Lewis’ latest book “Next: The Future Just Happened.” Lewis made his name exposing the inside operations of the bond office at Goldman Sachs. Now he’s exposing the latest generation of hucksters: futurists and technologists.

In “Next,” Lewis tells the story of two men named Jim Barton and Mike Ramsay who thought they could build a company based on the idea of home appliances talking to one other.

Huh?

I don’t know about you, but when I first heard about this, I thought it was nuts. What would the garage opener really say to the dishwasher if it had a chance? Would the toaster really care what the blender was doing out late with the food processor?

Sounds novel in theory.

But the reality is, ideas don’t change people’s behavior unless they have specific applications that are useful or desirable.

Fortunately, the marketplace thought the idea nuts too. So Barton and Ramsay moved on. They decided instead to focus on the convergence of television and computers. All it would take was a little black box.

With souped-up black boxes full of computer memory, people could record hours of television at home without ever using a VCR. What’s more, they could watch the programs they wanted to WHEN they wanted to watch them. And perhaps best of all, they could completely skip the commercials.

These obvious benefits made the black box – the TiVo – a hit with consumers. As Lewis says “Over time, the viewer could create, in essence, his own private television channel, stored on a hard drive in the black box, tailored to his interests.”

But besides letting people watch what they wanted, when they wanted, the black box would have an unexpected function: it would watch the viewer.

Not literally. Rather, it would accumulate a vast database of every user’s viewing habits… when you changed the channels, what time you watched your programs, how long you watched for, how may commercials you watched.

The last part was crucial.

In early trials, 88% of viewers used the TiVo to skip over commercials.

The findings were network television’s worst nightmare – a new technology that blows gaping holes in their multi-billion dollar ad-revenue-based business model.

Or maybe not…

You may be shocked to find this out, but people actually LIKE to get advertising – when it’s advertising for things they want.

Case in point: Three weeks ago, when I was experiencing the worst heartburn of my life, I was eager for anyone who could promise me some relief. I wasn’t interested in hemorrhoid ointments (although if I’d had them at the time, I probably would have been).

I was looking for a real solution to a real problem. A database of my viewing habits could have helped marketers target me with a solution.

The same could be said of people shopping for thousands of item…diapers, cars, home security.

It doesn’t matter that 88% of viewers skip commercials… if you can reach the only ones watching who will buy.

I can’t tell you the future of TiVo. For one thing, there are privacy issues to overcome.

But the phenomenon makes sense. The consumer gets more choices and lower prices. Advertisers find out how to serve you better by knowing what you buy.

That’s the way the free enterprise system works. If TiVo helps marketers to capitalize on that, their future could be bright indeed.

Therein lies the lesson for investors.

Wall Street has made a living from offering painfully generic investment advice to the entire country: Buy, buy, buy!

Sure, they’ve told people to diversify, and buy value stocks along with growth stocks. But they did this only after stocks stopped going up.

The results have been disastrous for many.

Why? In retrospect, the advice Wall Street has given America is the equivalent of a primetime ad for Pepsi: it’s designed to appeal to the broadest audience possible. The broader the advice is, the less useful it becomes.

If your goals are ambitious – if you see the market as a vehicle to finance your business, your retirement, your chateau overseas – there ARE ways to make these things happen.

But only with better-targeted solutions.

For instance, between 1969 and 1979, Morgan Stanley Capital International’s Europe, Australia, Far East Index (EAFE), almost doubled the return you would have gotten on the S&P 500 – 10.09% to 5.86%. Between 1979 and 1989 it was even better. The EAFE index returned 22.7% while the S&P returned just 17.5%.

It’s not being in the right stock that matters. It’s being in the right asset class. And knowing which asset class has the best return tells you which asset to own. This, of course, turns the Wall Street “buy and hold” mantra on its head.

Of course, there is no TiVo database that tracks investor goals. If only there were, Wall Street’s generic, watered down, self-serving bombast might finally come to an end.

Regards,

Dan Denning August 17, 2001

Daily Reckoning, Blue

Daniel Denning is the editor of the Daily Reckoning Investment Advisory. For investment advice consistent with the ideas in this essay, please subscribe to the Daily Reckoning Blue Service:

*** Ah yes… now we’re getting down to it. “The ‘real heroes’ in the front line of the battle against the slump,” says the Financial Times, “may well be the unsung ones – people such as Jonathan Fink.”

*** The loveable Mr. Fink, we’re told, “is a 28-year-old insurance company employee who lives in southern New Jersey and commutes to work in Philadelphia.” He recently took out a bank loan… and bought a new Mercedes sports car.

*** This summer, “paying close attention to financial developments by monitoring the Internet,” Mr. Fink noticed the mortgage rates dropping – while the value of his suburban Cherry Hill home skyrocketed… so he took out a second mortgage and paid off the higher interest rate car loan.

*** “Home ownership has become the means by which American consumers are continuing to spend in the face of the most severe business contraction in a decade,” says the FT. “Tens of billions of dollars in cash have thus been injected into the economy.”

*** “You see, Addison,” Eric wrote to me last night. “There’s nothing to worry about… as long as we can suck the equity out of our homes.”

*** Unfortunately, one item disappearing rapidly…”is home equity that is actually owned by the homeowner. In 1945, Americans owed mortgage creditors just 14% of the value of their homes – the rest, 86%, was theirs as equity. [But] as of the first quarter [of 2001] they owed 45%, leaving [only] 55% in equity.”

*** You may be interested to know that I spoke to Bill last night. He and la famille have arrived back from their vacation in Nicaragua and are safely back at Ouzilly. He reports only that the vacation went well, and that he’ll be back “on the job” on Monday… until then, on with the show.

Eric, what’s shakin’ in the Big Apple?

*****

Eric Fry reporting from Wall Street:

– It had to happen – the dollar falls and immediately Wall Street parades out the tired list of multinationals “certain” to benefit from dollar weakness. McDonald’s, a company that produces about 58% of its sales outside the U.S., always seems to top the list.

– What the analysts neglect to mention is the part about why the dollar is falling – little things like a gaping current account deficit, a recessionary economy, and a waning foreign appetite for U.S. assets.

– If, for example, the dollar is falling because foreigners are selling their U.S. equity holdings, these U.S.-based and U.S.-traded multinational stocks may not be such great assets to own.

– Nevertheless, for a day, companies like McDonald’s, Procter & Gamble and Merck were back in vogue with investors.

– Still, overall, the trading action on Wall Street remains uninspired at best. Thanks mostly to the aforementioned multinationals, the Dow advanced 46 points. The Nasdaq managed an 11-point gain… its second positive close in 10 sessions.

– Most telecom and Internet stocks have fallen so far from their highs that they have very few points left to lose. Nevertheless, Ciena managed to plummet 30% yesterday to $19.62, after the company forecast “lower than expected” earnings.

– The first mistake, it seems to me, was expecting any earnings in the first place.

– The dollar’s decline seems to be gaining a head of steam. The world’s most popular brand of currency fell for the seventh straight day to 91.6 cents per euro. The greenback’s cumulative losses against the euro since last July now total more than 7%.

– “To finance both our current account deficit and our own export of capital,” former Fed chairman, Paul A. Volcker, testified on July 25th before the Senate Banking Committee’s Subcommittee on Economic Policy, “we must import close to $3 billion of capital every working day to balance our accounts. That is simply too large an amount to count on maintaining year after year, much less enlarging.”

– But as James Grant observes, “Americans consume more of the world’s goods than they produce. They finance the deficits with dollars. The beauty of the position of the United States as a debtor nation is that hundred-dollar bills cost no more to print than singles do.”

– Have you noticed how all the Wall Street analysts have started proclaiming their “independence” and “honesty?” Don’t believe it. These claims are but the latest marketing ploy. The style and form of the game may change, but the rules of the game never do:

Rule #1: Wall Street wins; Rule #2: You lose.

– As Chris Byron writes, “When sell-side financial analysts spoke of ‘new paradigm’ concepts for stock valuation, they knew they were spouting nonsense. They knew it was demonstrably absurd to speak of ‘revenue growth’ as a way to determine a stock’s worth in the market. They knew it was all baloney, but they spouted it anyway – because the fees their firms stood to earn (and thus their own bonuses) were so enormous. In other words, the temptation proved too great to resist, and they simply wound up stealing from the market.

– How much was stolen? “Coming up with a precise number is almost certainly impossible,” says Byron. “But one way to look at the matter is to make reference to the infamous ‘Internet Suckers Index'”… which Mr. Byron began publishing on an irregular basis – and to much derision – as the dot-com bubble swelled ever-larger.

– “Of the more than 400 Internet stocks we monitored on a regular basis during the course of the boom,” Byron concludes, “only seven are still in positive territory from their offering prices – with nearly every other one having lost more than 95 percent of its value; most have simply gone out of business and disappeared.”

*****

Back to Addison, writing from London today…

*** Curiously enough, as I write this, my friend and fellow scribbler John Forde and I are stuck on the Eurostar just outside of London. We’ve been sitting here for about half an hour, armed only with the information that was given to us over the loudspeaker 5 minutes ago…

“We are troubled to inform you,” said a voice in a heavy French accent. “We are stuck in this place because the immigrants are on the track.”

*** Anyway, here we sit. We’re on our way to London to conduct a little business. But also to join in the wedding celebration of two of our colleagues, and great friends, from the London office. Congratulations, Nic and Ellie! Hope you’ll enjoy many happy years…

*** Arriving on the train from Paris is “a little like passing through Hamden,” observed John, referring to a little-known hub of humanity in Baltimore. “Every backyard’s got a big wheel, a satellite dish and laundry hanging out to dry…” There’s something a little unsettling about the sudden awareness that everywhere you go vaguely reminds you of somewhere you’ve already been.

The Daily Reckoning

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About Dan Denning:

Dan Denning is the author of 2005’s best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia.